Do we need another stimulus plan?

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Michel Kelly-Gagnon, QMI Agency

Dec 7, 2012

, Last Updated: 12:51 PM ET

Over the past couple of months, Finance Minister Jim Flaherty has repeatedly said that he isn't ruling out another stimulus spending package like the one we had in 2008-09 in the event of a deterioration of the global economy.

Before we embark on another spending binge, shouldn't we first evaluate if stimulus plans work, if they are necessary, and if they are grounded in sound economic logic?

After four years of this regimen in many countries, some of which are now on the verge of bankruptcy, it should be clear that stimulus spending doesn't "stimulate" much, except the market for government debt.

Canada's stimulus package was relatively modest by international standards. Canada is also one of the rare developed countries that should be able to return to a balanced budget within a couple of years.

If the logic of stimulus spending were correct, we should be the ones still mired in recession, while others who spent way more should be firing on all cylinders.

There is a fundamental reality that fans of government spending seem to forget: whenever government tries to stimulate the economy, it can only do so by taking away resources from the private sector.

For example, public building projects bid away trucks, manpower, steel and bricks. It makes them more expensive and leaves fewer of them available for private entrepreneurs.

This is true at any time. But it is even more crucial in times of crisis.

Of course, it's easy to see the immediate impact of government spending, which seems to create economic activity. What you don't see is the continued misallocation of resources and the uncertainty about future conditions that keep private businesses from investing as much as they would like to.

But don't we have evidence that 'austerity' doesn't work either, as the cases of Greece, Great Britain and other countries illustrate?

Actually, most of these countries did not cut spending in absolute terms - they simply slowed down the rate of growth in their spending. And they also increased taxes to avoid sinking further into debt. Both took resources from the private economy, which is the opposite of what they should be doing.

Austerity for citizens and businesses certainly doesn't work. What would work is a real austerity package for governments, which hasn't really been tried.

Michel Kelly-Gagnon is president of the Montreal Economic Institute (www.iedm.org). The views reflected in this column are his own.